Larry Swedroe: 3% is the new 4%

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Re: Larry Swedroe: 3% is the new 4%

Post by willthrill81 »

international001 wrote: Fri Feb 08, 2019 8:29 pm
JackoC wrote: Tue Feb 05, 2019 6:14 pm 2) more obviously, the SPIA will look worthless if you assume you know how long you're going to live and it's not extremely long. But you don't know, which is the whole idea of annuities. I didn't see all the AS video's but in the couple I made it through they didn't even acknowledge that difference. Annuities cover risk of living much longer than you expect to, though imperfectly for various reasons. A simple collection of ETF's can only address that risk by lowering the withdrawal rate.
Exactly! we are talking about a 3% SWR for income guarantee of 99.9%. An annuity can give you >4% (everything inflation adjustment). If this is the only think you care about, why is the choice so difficult. I could give a damn about the fees they charge me. They are giving me the maximum return for the risk I need (0).
The big cons with the SPIA are (1) it locks you into at least the bottom quintile of historic market returns (remember that a 5-6% WR would have generally worked fine for a 30 year retirement) and (2) you and likely your heirs permanently lose all access to the annuitized funds (i.e. completely illiquid).
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Re: Larry Swedroe: 3% is the new 4%

Post by cheezit »

If PE10/CAPE was devised to remove error from brief earnings spikes, just running the regular PE through a low-pass filter would be a better way to accomplish that goal. Using the current value of price divided by the ten-year boxcar average of earnings has exactly one thing going in its favor, that it's easy to hand calculate.
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Re: Larry Swedroe: 3% is the new 4%

Post by international001 »

willthrill81 wrote: Fri Feb 08, 2019 8:43 pm
international001 wrote: Fri Feb 08, 2019 8:29 pm
JackoC wrote: Tue Feb 05, 2019 6:14 pm 2) more obviously, the SPIA will look worthless if you assume you know how long you're going to live and it's not extremely long. But you don't know, which is the whole idea of annuities. I didn't see all the AS video's but in the couple I made it through they didn't even acknowledge that difference. Annuities cover risk of living much longer than you expect to, though imperfectly for various reasons. A simple collection of ETF's can only address that risk by lowering the withdrawal rate.
Exactly! we are talking about a 3% SWR for income guarantee of 99.9%. An annuity can give you >4% (everything inflation adjustment). If this is the only think you care about, why is the choice so difficult. I could give a damn about the fees they charge me. They are giving me the maximum return for the risk I need (0).
The big cons with the SPIA are (1) it locks you into at least the bottom quintile of historic market returns (remember that a 5-6% WR would have generally worked fine for a 30 year retirement) and (2) you and likely your heirs permanently lose all access to the annuitized funds (i.e. completely illiquid).

Sure, but I already assumed I don't care about (2). And regarding (1), the main point is that I'm not looking at average returns, but about safe returns. SPIA can give you a better rate for a 100% guarantee.
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Re: Larry Swedroe: 3% is the new 4%

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What page in Larry's book is the 3% to 4% reference??

1210
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Re: Larry Swedroe: 3% is the new 4%

Post by willthrill81 »

1210sda wrote: Wed Feb 20, 2019 7:53 pm What page in Larry's book is the 3% to 4% reference??

1210
His appearance on the Afford Anything podcast is what precipitated this thread.
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Re: Larry Swedroe: 3% is the new 4%

Post by flyingaway »

How about 4% SWR with a 33% buffer that we are always happy to build, versus a barebone 3% SWR?
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Re: Larry Swedroe: 3% is the new 4%

Post by pdavi21 »

The 4% rule is stupid anyway. Obviously, withdrawing 1/25 of your portfolio is going to last 25 years or more (assuming you can match or beat inflation with low risk).
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Re: Larry Swedroe: 3% is the new 4%

Post by Leesbro63 »

pdavi21 wrote: Wed Feb 20, 2019 8:42 pm The 4% rule is stupid anyway. Obviously, withdrawing 1/25 of your portfolio is going to last 25 years or more (assuming you can match or beat inflation with low risk).
Why is it stupid? Perhaps it’s far from perfect. But more perfect than most other retirement drawdown (SWR) plans.

And if we have another 1929 or 1966, you’re probably not going to beat inflation over your remaining life expectancy

It ain’t simple.
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Re: Larry Swedroe: 3% is the new 4%

Post by pdavi21 »

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Re: Larry Swedroe: 3% is the new 4%

Post by Leesbro63 »

pdavi21 wrote: Wed Feb 20, 2019 9:00 pm
Leesbro63 wrote: Wed Feb 20, 2019 8:51 pm
pdavi21 wrote: Wed Feb 20, 2019 8:42 pm The 4% rule is stupid anyway. Obviously, withdrawing 1/25 of your portfolio is going to last 25 years or more (assuming you can match or beat inflation with low risk).
Why is it stupid? Perhaps it’s far from perfect. But more perfect than most other retirement drawdown (SWR) plans.

And if we have another 1929 or 1966, you’re probably not going to beat inflation over your remaining life expectancy

It ain’t simple.
It's stupid because:
1. Most people never reach it
2. Most people receive fixed income in addition to "assets"
3. 95% chance of success is too conservative
1. Many (most?) serious Bogleheads do.
2. Fixed income (SS, pension) is irrelevant. It’s 4% of the asset value, regardless of other income.
3. It’s not just about the chance of success. It’s also about the magnitude and misery of the consequences of failure. My house only has a <1% chance of being destroyed but I’m not dropping property insurance.
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Re: Larry Swedroe: 3% is the new 4%

Post by 2pedals »

pdavi21 wrote: Wed Feb 20, 2019 9:00 pm
Leesbro63 wrote: Wed Feb 20, 2019 8:51 pm
pdavi21 wrote: Wed Feb 20, 2019 8:42 pm The 4% rule is stupid anyway. Obviously, withdrawing 1/25 of your portfolio is going to last 25 years or more (assuming you can match or beat inflation with low risk).
Why is it stupid? Perhaps it’s far from perfect. But more perfect than most other retirement drawdown (SWR) plans.

And if we have another 1929 or 1966, you’re probably not going to beat inflation over your remaining life expectancy

It ain’t simple.
It's stupid because:
1. Most people never reach it
2. Most people receive fixed income in addition to "assets"
3. 95% chance of success is too conservative
I would use the safe withdrawal rate rule to help you decide if you have enough to cover living expenses or other expenses above your fixed income. If you need more maybe you should to be worrying about running out of money and continue to use your human capital. I don't see what is stupid about planning and protecting yourself for the future.
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Re: Larry Swedroe: 3% is the new 4%

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Re: Larry Swedroe: 3% is the new 4%

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Re: Larry Swedroe: 3% is the new 4%

Post by DG99999 »

I believe that the validity of a 3% rule can be determined by asking - "Is this rule best for me, or is it best for professional financial advisors?"

You may find the answer without any simulations, assumptions or even basic arithmetic.
I am not a financial professional. My posts are only my opinion on the topic. You need to do your own due diligence and consult with a professional when addressing your financial questions.
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Re: Larry Swedroe: 3% is the new 4%

Post by develop »

TheTimeLord wrote: Sun Feb 03, 2019 11:31 am
larryswedroe wrote: Sun Feb 03, 2019 10:17 am
But then would add that US has been what has been called the triumph of the optimists (the winner) and while 4% might have worked in past looking at historical data, you would find in other countries (i.e. Japan say starting in 1990, with Nikkei now at about half what it was then) that it did not work.
Maybe I foolishly discount the Japan scenario because their market was ridiculously priced in relation to the growth of their companies, even outstripping our Dot Com bubble if memory serves which had a PE around 40 if memory serves. Am I finding comfort in an irrelevant piece of data?
In early 1989, the average price-to-earnings (P/E) ratio for all stocks on the Tokyo Stock Exchange first section was around 58.
I don't know why the Japan scenario was mentioned in the first place. A 3% withdrawal rate would not have survived that scenario, right? So, one must disregard the possibility or come up with a lower withdrawal rate. It seems (unintentionally) misleading to mention Japan in support of a 3% withdrawal rate.
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Re: Larry Swedroe: 3% is the new 4%

Post by develop »

DG99999 wrote: Wed Feb 20, 2019 11:56 pm I believe that the validity of a 3% rule can be determined by asking - "Is this rule best for me, or is it best for professional financial advisors?"

You may find the answer without any simulations, assumptions or even basic arithmetic.
I'm interested in this theory and don't necessarily disagree. I think it's always good to be skeptical of where advice comes from. Could you speak more to why this is good for advisors?

The first two things I think of:
1. The higher their clients maintain their balances, the more advisors get from them in AUM.
2. The more scared investors are that this is dangerous, tricky stuff, the more likely they'll pay for help.

Are there other reasons you were alluding to?

I'm not taking a stance against a 3% withdrawal rate. I haven't done enough research to have a strong opinion (and don't need to for a while). I just agree in principal that it's good to consider one's potential motives.
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Re: Larry Swedroe: 3% is the new 4%

Post by develop »

larryswedroe wrote: Sun Feb 03, 2019 12:10 pm Note that most of the investment risk occurs in the first five years, but then as I explained much of the spending risk occurs later, assuming you live long enough, due to risks of needed long term care and especially when you look at odds of having serious cognitive declines. I cannot tell you how many families I have seen this occur to and wipe out their retirement plans or that of their parents.

And to others, yes excluding Japan is serious error IMO. There are many arguments one could make for US future economic growth being well below long term data, [OT comment removed by admin LadyGeek]. So failures can come from not just high valuations but declining economic growth as well.

Larry
I hadn't gotten very far in this thread and now see that the Japan scenario is being mentioned again. Larry, you say that excluding Japan is a serious error. Does that mean that your assumptions include the Japan scenario? Are you saying that a 3% withdrawal rate would work with Japan-like returns in USA?

If not, then the 3% withdrawal rate is also excluding Japan, which you caution against, and Japan shouldn't be used as an argument for 3%. Though it technically could happen, many would find it far too conservative to use a withdrawal rate that would survive that scenario.

I'm also curious about these families whose retirement was wiped out by long-term care expenses. Were these families who were using a 4% withdrawal rate and got burned? Do you have reason to believe that a 3% withdrawal rate would have survived their situation?

If the answer to these questions is no, then this anecdote doesn't tell us much. If they ran out of money because long-term care expenses arose and they were withdrawing 6%, this can't be used to attack the 4% withdrawal rate. If those expenses got so bad that they would have run out of money even with a 2% withdrawal rate, then this can't be used to argue for a 3% withdrawal rate.
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Re: Larry Swedroe: 3% is the new 4%

Post by Greg in Idaho »

develop wrote: Thu Feb 21, 2019 6:42 am
DG99999 wrote: Wed Feb 20, 2019 11:56 pm I believe that the validity of a 3% rule can be determined by asking - "Is this rule best for me, or is it best for professional financial advisors?"

You may find the answer without any simulations, assumptions or even basic arithmetic.
I'm interested in this theory and don't necessarily disagree. I think it's always good to be skeptical of where advice comes from. Could you speak more to why this is good for advisors?

The first two things I think of:
1. The higher their clients maintain their balances, the more advisors get from them in AUM.
2. The more scared investors are that this is dangerous, tricky stuff, the more likely they'll pay for help.
I think this gets at the main reasons...and this doesn't necessarily imply any nefarious motives by advisors. Actually, these elements could act as a source of confirmation for advisors of the value of what they are doing.
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Re: Larry Swedroe: 3% is the new 4%

Post by EnjoyTheJourney »

Building on Greg in Idaho's post, it probably serves an advisor's interests to make things out as complex and difficult to predict and to convince retirees to be conservative with withdrawals. But, experienced advisors have probably seen enough cases where people's retirements took a dark turn after the client ignored or downplayed "low risk, high threat" scenarios that they tend to see part of their role as being about highlighting worst case scenarios.

As a client, how would you feel if worst case scenarios were not carefully described by your financial advisor and then they happened to you?
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Re: Larry Swedroe: 3% is the new 4%

Post by JackoC »

willthrill81 wrote: Fri Feb 08, 2019 8:43 pm
international001 wrote: Fri Feb 08, 2019 8:29 pm
JackoC wrote: Tue Feb 05, 2019 6:14 pm 2) more obviously, the SPIA will look worthless if you assume you know how long you're going to live and it's not extremely long. But you don't know, which is the whole idea of annuities. I didn't see all the AS video's but in the couple I made it through they didn't even acknowledge that difference. Annuities cover risk of living much longer than you expect to, though imperfectly for various reasons. A simple collection of ETF's can only address that risk by lowering the withdrawal rate.
Exactly! we are talking about a 3% SWR for income guarantee of 99.9%. An annuity can give you >4% (everything inflation adjustment). If this is the only think you care about, why is the choice so difficult. I could give a damn about the fees they charge me. They are giving me the maximum return for the risk I need (0).
The big cons with the SPIA are (1) it locks you into at least the bottom quintile of historic market returns (remember that a 5-6% WR would have generally worked fine for a 30 year retirement) and (2) you and likely your heirs permanently lose all access to the annuitized funds (i.e. completely illiquid).
Sorry to respond late, but again the problem with 1) is not taking into account that expected returns on fixed income now are much lower than historical. As in 'Annuity Slayer' showing how a very bond-heavy stock-bond mix (28/72 was it?) beat today's annuity return some very high % of the time historically...but that relies heavily on the past realized real return of long term bonds, around 3%. Today's expected return on long term bonds is only around 1% (the long term TIPS yield). That's apples and oranges.

There is no reason to think fixed annuities priced off today's yield curve (they mainly are priced based on the 'riskless'/low risk yield curve, mainly what they are funded by) lock you into any poorer return than long term bonds *now*. If you'd buy stocks instead of bonds, that's a different question. Of course you'd expect higher risk to result in higher return. IOW point 1 might be made more valid by positing that you must take a large amount of stock risk in retirement, and fixed annuities don't allow you to do that. However a more reasonable approach IMO would be to assume that fixed annuities largely compete with bonds in a fairly large portion of a during-retirement portfolio, which can separately also have some stocks. In that case point 1 is pretty completely invalid. Significantly higher expected return is not a valid reason to favor bonds over fixed SPIA's.

There are reasons not to like fixed SPIA's. The most serious IMO is that CPI adjusted annuities are practically extinct. Combined with the naturally long contingent duration of annuities (you rely on them most in the case where you live a long time) there's a lot of inflation risk. Which TIPS don't have, though TIPS in turn don't provide longevity insurance. And second SPIA's have (more) credit risk you have to diversify by either limiting annuities to a moderate % of portfolio or getting multiple ones (which again tends to rule out CPI adjusted ones as much of the answer, since only one company The Principal, if it still does, provided CPI adjusted SPIA's them last I looked).

The fact that annuities don't pay heirs OTOH is, in the overused phrase, 'a feature not a bug'. You have to decide upfront if your goal is more certainly not running out of money yourself in a longer than expected life, or more certainly having some go to heirs. And again saying anything positive about SPIA's isn't equivalent to saying they are *the* answer for 100% of everyone's portfolio once retired (let alone long before that).

The simple point here though, under '3% is the new 4%' is that the analysis which says SPIA's now are priced for a 'poor' return compared mainly to *bond* returns in the past, an assumption firmly planted in Annunity Slayer's analysis, is bogus.
Last edited by JackoC on Thu Feb 21, 2019 10:26 am, edited 1 time in total.
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Re: Larry Swedroe: 3% is the new 4%

Post by MnD »

flyingaway wrote: Wed Feb 20, 2019 8:22 pm How about 4% SWR with a 33% buffer that we are always happy to build, versus a barebone 3% SWR?
How about 5% SWR with 30% spending flexibility (3.5% SWR) if and only if needed?
That plays out quite well at Rich, Broke or Dead and one can easily test similiar approaches at cfiresim and elsewhere with similiar outcomes.

Why anyone would "lock in" a worst than worst case 3% SWR retirement plan as a base case whether one needs to or not is really beyond me. Hopefully 3% does not become the new BH gospel because I couldn't recommend this site to anyone in that situation, any more than I could recommend retirement income strategies of day-trading, buying last years hot stocks/funds or signing up at Edward Jones. The drag in terms of a shorter or no retirement and/or a poor and inefficient method of providing retirement income from retirement savings is just too great for all these things.

5% SWR with 30% spending flexibility, 70/30 AA, 35 years, .10ER,
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70/30 AA for life, Global market cap equity. Rebalance if fixed income <25% or >35%. Weighted ER< .10%. 5% of annual portfolio balance SWR, Proportional (to AA) withdrawals.
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Re: Larry Swedroe: 3% is the new 4%

Post by Leesbro63 »

JackoC wrote: Thu Feb 21, 2019 10:22 am
willthrill81 wrote: Fri Feb 08, 2019 8:43 pm
international001 wrote: Fri Feb 08, 2019 8:29 pm
JackoC wrote: Tue Feb 05, 2019 6:14 pm 2) more obviously, the SPIA will look worthless if you assume you know how long you're going to live and it's not extremely long. But you don't know, which is the whole idea of annuities. I didn't see all the AS video's but in the couple I made it through they didn't even acknowledge that difference. Annuities cover risk of living much longer than you expect to, though imperfectly for various reasons. A simple collection of ETF's can only address that risk by lowering the withdrawal rate.
Exactly! we are talking about a 3% SWR for income guarantee of 99.9%. An annuity can give you >4% (everything inflation adjustment). If this is the only think you care about, why is the choice so difficult. I could give a damn about the fees they charge me. They are giving me the maximum return for the risk I need (0).
The big cons with the SPIA are (1) it locks you into at least the bottom quintile of historic market returns (remember that a 5-6% WR would have generally worked fine for a 30 year retirement) and (2) you and likely your heirs permanently lose all access to the annuitized funds (i.e. completely illiquid).
Sorry to respond late, but again the problem with 1) is not taking into account that expected returns on fixed income now are much lower than historical. As in 'Annuity Slayer' showing how a very bond-heavy stock-bond mix (28/72 was it?) beat today's annuity return some very high % of the time historically...but that relies heavily on the past realized real return of long term bonds, around 3%. Today's expected return on long term bonds is only around 1% (the long term TIPS yield). That's apples and oranges.

There is no reason to think fixed annuities priced off today's yield curve (they mainly are priced based on the 'riskless'/low risk yield curve, mainly what they are funded by) lock you into any poorer return than long term bonds *now*. If you'd buy stocks instead of bonds, that's a different question. Of course you'd expect higher risk to result in higher return. IOW point 1 might be made more valid by positing that you must take a large amount of stock risk in retirement, and fixed annuities don't allow you to do that. However a more reasonable approach IMO would be to assume that fixed annuities largely compete with bonds in a fairly large portion of a during-retirement portfolio, which can separately also have some stocks. In that case point 1 is pretty completely invalid. Significantly higher expected return is not a valid reason to favor bonds over fixed SPIA's.

There are reasons not to like fixed SPIA's. The most serious IMO is that CPI adjusted annuities are practically extinct. Combined with the naturally long contingent duration of annuities (you rely on them most in the case where you live a long time) there's a lot of inflation risk. Which TIPS don't have, though TIPS in turn don't provide longevity insurance. And second SPIA's have (more) credit risk you have to diversify by either limiting annuities to a moderate % of portfolio or getting multiple ones (which again tends to rule out CPI adjusted ones as much of the answer, since only one company The Principal, if it still does, provided CPI adjusted SPIA's them last I looked).

The fact that annuities don't pay heirs OTOH is, in the overused phrase, 'a feature not a bug'. You have to decide upfront if your goal is more certainly not running out of money yourself in a longer than expected life, or more certainly having some go to heirs. And again saying anything positive about SPIA's isn't equivalent to saying they are *the* answer for 100% of everyone's portfolio once retired (let alone long before that).

The simple point here though, under '3% is the new 4%' is that the analysis which says SPIA's now are priced for a 'poor' return compared mainly to *bond* returns in the past, an assumption firmly planted in Annunity Slayer's analysis, is bogus.
Even inflation adjusted annuities and TIPS, unless in a Roth account, won't totally help if we get the big inflation they are bought to protect against. Because of taxflation on nominal (inflation adjusted) gains.
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Re: Larry Swedroe: 3% is the new 4%

Post by willthrill81 »

JackoC wrote: Thu Feb 21, 2019 10:22 amThere is no reason to think fixed annuities priced off today's yield curve (they mainly are priced based on the 'riskless'/low risk yield curve, mainly what they are funded by) lock you into any poorer return than long term bonds *now*. If you'd buy stocks instead of bonds, that's a different question.
And that was what I was referring to. Historic backtesting has shown that success rates of the '4% rule' were optimized with an AA of between 50/50 and about 75/25. At today's rates at least, a SPIA provides a payout roughly equivalent to the worst-case historic scenarios which the '4% rule' was devised for, albeit with the guaranty that you won't outlive your income.
Last edited by willthrill81 on Thu Feb 21, 2019 11:24 am, edited 1 time in total.
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Re: Larry Swedroe: 3% is the new 4%

Post by JackoC »

MnD wrote: Thu Feb 21, 2019 10:25 am
flyingaway wrote: Wed Feb 20, 2019 8:22 pm How about 4% SWR with a 33% buffer that we are always happy to build, versus a barebone 3% SWR?
How about 5% SWR with 30% spending flexibility (3.5% SWR) if and only if needed?
That plays out quite well at Rich, Broke or Dead and one can easily test similiar approaches at cfiresim and elsewhere with similiar outcomes.
Level SWR's are just planning metrics. By which I mean just about nobody, I'm pretty sure not Larry S, certainly not me, is saying it's necessary or likely to strictly stick to the X% of initial, then CPI adjust the dollar amount. Obviously people would adapt either way to what actually happens.

However adopting a more complicated definition of the withdrawal pattern (X % if this Y% less if Z happens) IMO just makes the whole exercise more of a black box. Which IMO is also a problem with the simulation link you used and ones like it. They IMO tend to draw attention toward details of the output, and away from basic questions about the inputs.

That simulator assumes the expected return of both stocks and bonds is the same as realized historical return. That's an obviously aggressive assumption in case of bonds, but I believe in case of stocks too. It assumes Social Security data for life expectancy, again aggressive from the POV of people with significant retirement savings who tend to be from demographic groups with notably higher LE than the US average.

I'd go simpler. I believe a realistic expected after tax return for 60/40 in my tax situation is around 2%. My life expectancy from now per personalized calculator is around 32 yrs (v. ~22 on Social Security table). With a few cells in Excel or a financial calculator, 4% SWR money runs out in ~35 yrs at 2% real return. So that's OK at the expected return, but leaves little cushion. 3% OTOH lasts 35 yrs at a real return of only ~0.25%, obviously not far from zero, 2.86% lasts 35 yrs at 0% real return, 1/35. There's risk of living longer than expected, but still seems to me 3% is fairly conservative, 4% really isn't anymore, because E[r] is now lower than the average of past realized returns, and because of the growing skew in upper middles class US LE v the SSA table.

If one disputes either of those ideas, that's the scope for argument seems to me. Just reproducing results from simulations using more optimistic assumptions is neither here nor there. Same for accepting a higher % chance of failure, that's fine but doesn't contradict Larry S's implicit point that 3% is more appropriate now to achieve the failure rate 4% *used* to achieve. And likewise again for increasing/cutting back spending as portfolio grows/shrinks. The relevant number is how much you have to save. Think of that as just being *expressed* in terms of an SWR %, not somehow dictating you actually stick to that SWR every year in real life. Kind of like a bond yield: we express the value as X% yield, but when you go to actually buy a particular bond you pay an amount of $'s.
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Re: Larry Swedroe: 3% is the new 4%

Post by JackoC »

willthrill81 wrote: Thu Feb 21, 2019 10:51 am
JackoC wrote: Thu Feb 21, 2019 10:22 amThere is no reason to think fixed annuities priced off today's yield curve (they mainly are priced based on the 'riskless'/low risk yield curve, mainly what they are funded by) lock you into any poorer return than long term bonds *now*. If you'd buy stocks instead of bonds, that's a different question.
And that was what I was referring to. Historic backtesting has shown that success rates of the '4% rule' were optimized with an AA of between 50/50 and about 75/25. At today's rates at least, a SPIA provides a payout roughly equivalent to the worst-case historic scenarios which the '4% rule' was devised for, albeit with the guaranty that you won't allow your income.
Comparing 50-50 stock/bond historical results to SPIA pricing now is still 50% a glaringly wrong apples v. oranges comparison of 3% historical realized return on long term US bonds to annuity priced off today's curve where we *know* the 30 yr yield and therefore expected return is only 1% real, not 3%. That's even if you assume the expected return of stocks is as high as the realized historical return of stocks, which it's probably not close to either. The Annuity Slayer analysis compounds this error to the point of absurdity by comparing 28/72 stock/bond historical to today's SPIA yield. In case of 75-25 that obvious mistake with bonds is reduced...but there's still the issue of whether it's wise to assume stock expected return=historical realized at today's stock valuations, and 75% stock is a lot more risky than an SPIA. 100% stock beat 100% bond in the past, does that mean nobody should have bonds? :happy

Again your point is completely invalid to the extent it includes any comparison of past bond returns to current SPIA yields. That's penalizing SPIA's for bond yields being lower now, but pretending that wouldn't affect an investment in bonds now: clearly wrong.

To the extent you're saying the upside of stocks is favorable even for retired investors that's a reasonable point, subject to risk preference, for some portion of a portfolio. But that doesn't mean SPIA's are a poor value compared to their closest risk analog: bonds, for a lower risk portion of the portfolio.

The pooling of longevity risk in SPIA (the people who live longer get more, those who live less long get less) is *the* basic feature of the product. Harping on the downside of that feature (you/heirs don't get much if you don't live long) without mentioning the upside (annuity lasts indefinitely, a pile of bonds doesn't) does not make for valid general statements. Although, making a personal decision that that downside outweighs the upside in one's personal situation is perfectly reasonable.
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Re: Larry Swedroe: 3% is the new 4%

Post by MnD »

JackoC wrote: Thu Feb 21, 2019 11:18 am
MnD wrote: Thu Feb 21, 2019 10:25 am
flyingaway wrote: Wed Feb 20, 2019 8:22 pm How about 4% SWR with a 33% buffer that we are always happy to build, versus a barebone 3% SWR?
How about 5% SWR with 30% spending flexibility (3.5% SWR) if and only if needed?
That plays out quite well at Rich, Broke or Dead and one can easily test similiar approaches at cfiresim and elsewhere with similiar outcomes.
However adopting a more complicated definition of the withdrawal pattern (X % if this Y% less if Z happens) IMO just makes the whole exercise more of a black box. Which IMO is also a problem with the simulation link you used and ones like it. They IMO tend to draw attention toward details of the output, and away from basic questions about the inputs.

That simulator assumes the expected return of both stocks and bonds is the same as realized historical return. That's an obviously aggressive assumption in case of bonds, but I believe in case of stocks too. It assumes Social Security data for life expectancy, again aggressive from the POV of people with significant retirement savings who tend to be from demographic groups with notably higher LE than the US average.

I'd go simpler. I believe a realistic expected after tax return for 60/40 in my tax situation is around 2%. My life expectancy from now per personalized calculator is around 32 yrs (v. ~22 on Social Security table). With a few cells in Excel or a financial calculator, 4% SWR money runs out in ~35 yrs at 2% real return. So that's OK at the expected return, but leaves little cushion. 3% OTOH lasts 35 yrs at a real return of only ~0.25%, obviously not far from zero, 2.86% lasts 35 yrs at 0% real return, 1/35. There's risk of living longer than expected, but still seems to me 3% is fairly conservative, 4% really isn't anymore, because E[r] is now lower than the average of past realized returns, and because of the growing skew in upper middles class US LE v the SSA table.
I don't consider 5% of portfolio balance with a 3% inflation-adjusted floor to be a very complicated definition given the elementary-school level arithmetic required. Certainly the default of 5% of balance is greatly simplified from any inflation-adjusted approach.

It's easy to justify an ever-lower single-value SWR's by stringing together several "I believe" type pessimistic assumptions including things like a 35-year portfolio return of 0.25%. However if one actually needs, due to amazingly horrible and rare sequence of returns a 3% SWR, a percentage of portfolio approach with something like a 3% floor provides that just fine.

Note in an earlier post clipped below the blue dots are 30-year _real_ CAGR. Do you see any 2% real CAGR's? How about 0.25% CAGR's for 30 year sequences? If you want to invent a future bounded by 0.25%-2% real CAGR's and use the lower bounds to set a SWR and have no flexibility in that construction, that's great. Have fun with that. We also read here on occasion about someone who posts that that has saved millions and hasn't touched a dime well into retirement due to pension and social security being "enough" and zero utility for any additional spending.

But the consequence of applying that for real-world prospective retirees, who don't generally have millions of "extra" saved is devastating in terms of years of retirement lost and especially the earlier healthy years of retirement lost. Not to mention unnecessarily reduced standards of living in retirement the vast majority of the time. It's basically retirement planning failure from day 1.
siamond wrote: Wed Feb 06, 2019 3:35 pm
Note that the relation between CAGR and SWR is surprisingly loose, as Will already hinted at. Let me try to make the point more clear because it is certainly a tad counter-intuitive. I assembled the following graphs by tweaking a tad the Simba backtesting spreadsheet. Every vertical is a retirement cycle of 30 years, starting on the year indicated on the X axis. And you'll find the max WR (aka SWR) for each individual cycle as well as the (real) CAGR. Check those graphs carefully. If you perceive that the blue points (CAGR) give you any solid indication about the lowest pink points (SWR), I don't know, look again...

Image

Image
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Re: Larry Swedroe: 3% is the new 4%

Post by willthrill81 »

MnD wrote: Thu Feb 21, 2019 1:20 pmNote in an earlier post clipped below the blue dots are 30-year _real_ CAGR. Do you see any 2% real CAGR's? How about 0.25% CAGR's for 30 year sequences? If you want to invent a future bounded by 0.25%-2% real CAGR's and use the lower bounds to set a SWR and have no flexibility in that construction, that's great. Have fun with that. We also read here on occasion about someone who posts that that has saved millions and hasn't touched a dime well into retirement due to pension and social security being "enough" and zero utility for any additional spending.

But the consequence of applying that for real-world prospective retirees, who don't generally have millions of "extra" saved is devastating in terms of years of retirement lost and especially the earlier healthy years of retirement lost. Not to mention unnecessarily reduced standards of living in retirement the vast majority of the time. It's basically retirement planning failure from day 1.
I find it very interesting indeed to see in that graph that every period with a real CAGR of under 3% (8 of them) supported a SWR of 4.7% to 6.6%.
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Re: Larry Swedroe: 3% is the new 4%

Post by MnD »

willthrill81 wrote: Thu Feb 21, 2019 1:31 pm
MnD wrote: Thu Feb 21, 2019 1:20 pmNote in an earlier post clipped below the blue dots are 30-year _real_ CAGR. Do you see any 2% real CAGR's? How about 0.25% CAGR's for 30 year sequences? If you want to invent a future bounded by 0.25%-2% real CAGR's and use the lower bounds to set a SWR and have no flexibility in that construction, that's great. Have fun with that. We also read here on occasion about someone who posts that that has saved millions and hasn't touched a dime well into retirement due to pension and social security being "enough" and zero utility for any additional spending.

But the consequence of applying that for real-world prospective retirees, who don't generally have millions of "extra" saved is devastating in terms of years of retirement lost and especially the earlier healthy years of retirement lost. Not to mention unnecessarily reduced standards of living in retirement the vast majority of the time. It's basically retirement planning failure from day 1.
I find it very interesting indeed to see in that graph that every period with a real CAGR of under 3% (8 of them) supported a SWR of 4.7% to 6.6%.
I think the desired outcome for some is a 3% or even lower SWR and it's an exercise of just moving the various dials to the left to some degree until lo and behold, 3% SWR is now just "fairly conservative" and justified. And 0% SWR on an X million portfolio for someone well into retirement is not an uncommon find here.
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Re: Larry Swedroe: 3% is the new 4%

Post by MnD »

1210sda wrote: Wed Feb 20, 2019 7:53 pm What page in Larry's book is the 3% to 4% reference??

1210
None that I could find.
In fact he stressed very clearly in the book that investors should not make "worst case" their base case in retirement planning.
Build in flexibility on many levels so that if worst case does happen to appear you can make adjustments.
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Re: Larry Swedroe: 3% is the new 4%

Post by JackoC »

MnD wrote: Thu Feb 21, 2019 1:20 pm
JackoC wrote: Thu Feb 21, 2019 11:18 am However adopting a more complicated definition of the withdrawal pattern (X % if this Y% less if Z happens) IMO just makes the whole exercise more of a black box.

I'd go simpler. I believe a realistic expected after tax return for 60/40 in my tax situation is around 2%. My life expectancy from now per personalized calculator is around 32 yrs (v. ~22 on Social Security table). With a few cells in Excel or a financial calculator, 4% SWR money runs out in ~35 yrs at 2% real return.
1. I don't consider 5% of portfolio balance with a 3% inflation-adjusted floor to be a very complicated definition given the elementary-school level arithmetic required. Certainly the default of 5% of balance is greatly simplified from any inflation-adjusted approach.

2. Note in an earlier post clipped below the blue dots are 30-year _real_ CAGR. Do you see any 2% real CAGR's? How about 0.25% CAGR's for 30 year sequences?
1. As something to actually do, it's not that complicated. As a simple way of expressing how much to save, I do think it's unnecessarily complicated. Again, 4% SWR aka save 25x annual spending seems to be an adequate way of expressing the savings target when people agree with it. It seems it only becomes too simple a way to express the target when somebody suggests 25x may be too low for comfort.

2. But the embedded assumption here is again that the expected return now is equal to the (geometric, etc) average of past returns. But for bonds that's *obviously* too optimistic, and for stocks it's pretty clearly too optimistic IMO. Which is really the basic issue here and in many discussions on this forum. The insistence that future realized returns must be a random selection from the whole distribution of past returns. Like the outcome of a roulette wheel or dice. Assuming the gaming devices haven't been tampered with, the statistical distribution of future returns is the same as the distribution of past ones, not contingent on any starting condition. And therefore 'how many times do you see that happening in the past?' (over a large set of *independent* samples*) is a strong argument. With financial asset returns there is much less reason to assume that. Expected returns are at least partly contingent on market pricing at the start point. Asset prices now are high by historical standards, expected returns are reasonably be assumed to be lower, again obviously so for bonds.

Specifically 2% real after tax on 60/40 is my planning assumption based on 4% real pre tax expected return for stocks (1/PE10 would be closer to 3% pre tax expected real return for US stocks), 1% real pre tax for bonds (the long term TIPS yield). Weighted average 2.8%, around 2% after tax in my tax situation. As a midpoint, which could be exceeded as likely as undershot, but undershooting counts more in choosing the benchmark SWR/multiple. 4%/25x provides enough at 2% real return for a low-mid 30's LE typical of healthy/healthy lifestyle upper middle class Americans in their early-mid 60's. Thus it could be termed adequate, especially with a caveat 'well I'll just spend less if needed'. But I don't see how it's conservative if 2% is the expected return, the midpoint, which could be significantly undershot. It's not conservative assumption on top of conservative assumption. It's basically one assumption on return, plus recognizing that the LE stats in the simulation are US average, but the US is a stratified society with significantly different LE's for different socio-economic and other demographics.

*which is another issue; let's say there's 120 years of relatively comparable past data in the US. That's only 4 *independent* 30 yr samples. There's loads of independent data saying what happens from day to day, much less saying what happens one 30 yr period to the next. It's garbage in, garbage out to conclude anything based on overlapping samples, which tell you variations of the same story, because the samples aren't independent. The next 30 yrs will contain none of the same data, the true past comparables are 30 yr periods sharing none of the same data with one another.
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Re: Larry Swedroe: 3% is the new 4%

Post by randomguy »

willthrill81 wrote: Thu Feb 21, 2019 1:31 pm
I find it very interesting indeed to see in that graph that every period with a real CAGR of under 3% (8 of them) supported a SWR of 4.7% to 6.6%.
I think that is just luck. Those periods all pretty much had a good 15-20 year initial period and then were hit with the late 60s/70s.

The sort of assumption we have isn’t so much that cagrs are going to be bad. It is they are going to be bad AND it is likely the bad years are coming soon(next 5-10 years). Nobody thinks we are going say stay at these valuations for 20 years and then contract.
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Re: Larry Swedroe: 3% is the new 4%

Post by siriusblack »

grok87 wrote: Sun Feb 03, 2019 8:36 am I'm suspicious of arguments involving valuations etc. seems like market timing.
Valuations are relevant for "expected returns" going forward. Said differently: Historically, high valuations were followed by lower forward returns. (This could be different in the future, but I tend to think the relationship between valuations and future returns will more or less hold true in the future, although the magnitude of the effect may or may not be the same going forward as it was in the past.)

Here's a chart illustrating this (from a quick google image search-- probably better or more recent charts exist if anyone has one handy):
Image
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Re: Larry Swedroe: 3% is the new 4%

Post by willthrill81 »

randomguy wrote: Fri Feb 22, 2019 10:41 am
willthrill81 wrote: Thu Feb 21, 2019 1:31 pm
I find it very interesting indeed to see in that graph that every period with a real CAGR of under 3% (8 of them) supported a SWR of 4.7% to 6.6%.
I think that is just luck. Those periods all pretty much had a good 15-20 year initial period and then were hit with the late 60s/70s.

The sort of assumption we have isn’t so much that cagrs are going to be bad. It is they are going to be bad AND it is likely the bad years are coming soon(next 5-10 years). Nobody thinks we are going say stay at these valuations for 20 years and then contract.
It probably was just happenstance that the CAGRs were low but the SWRs were moderately high, but it definitely demonstrates that you don't need great or even good returns to get a solid SWR. The sequence of returns matters more.
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Re: Larry Swedroe: 3% is the new 4%

Post by randomguy »

willthrill81 wrote: Fri Feb 22, 2019 12:19 pm
randomguy wrote: Fri Feb 22, 2019 10:41 am
willthrill81 wrote: Thu Feb 21, 2019 1:31 pm
I find it very interesting indeed to see in that graph that every period with a real CAGR of under 3% (8 of them) supported a SWR of 4.7% to 6.6%.
I think that is just luck. Those periods all pretty much had a good 15-20 year initial period and then were hit with the late 60s/70s.

The sort of assumption we have isn’t so much that cagrs are going to be bad. It is they are going to be bad AND it is likely the bad years are coming soon(next 5-10 years). Nobody thinks we are going say stay at these valuations for 20 years and then contract.
It probably was just happenstance that the CAGRs were low but the SWRs were moderately high, but it definitely demonstrates that you don't need great or even good returns to get a solid SWR. The sequence of returns matters more.
Yes sequence of returns dominate but the point is that valuations suggest that we are looking at a poor sequence of returns. Valuations aren't great at short term predictions (<5 years) or long term (25+ years). They are best for the mid range (8-15).
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Re: Larry Swedroe: 3% is the new 4%

Post by HomerJ »

randomguy wrote: Fri Feb 22, 2019 12:36 pmYes sequence of returns dominate but the point is that valuations suggest that we are looking at a poor sequence of returns. Valuations aren't great at short term predictions (<5 years) or long term (25+ years). They are best for the mid range (8-15).
Valuations don't say anything about sequence of returns.

Look, low overall returns don't doom 4%. 0% real gets you 25 years. 1% real gets you 30 years.

What mostly dooms 4% is a bad sequence of returns at the start of retirement. And not just a crash.

A long-drawn out downturn at the beginning of retirement is the danger.

A short crash that recovers quickly isn't enough to doom 4%. People who retired in 2000 or 2007 are doing fine.

So the main thing that dooms 4% is a long drawn out crash.

And valuations have zero predictive power there.

The "experts" can say long-term (or mid-term) "expected" returns are low based on valuations, but they are still high enough for 4% to work. "Expected" returns are higher than 1% real.

To say that 4% won't work, you have to say there will be a extended crash soon. And no one can predict that. Certainly not just from valuations.
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Re: Larry Swedroe: 3% is the new 4%

Post by visualguy »

The returns before the prolonged crash matter for your ability to survive this crash. If the portfolio returns nothing and then crashes, the fact that it crashed a bit later rather than sooner doesn't help you all that much.
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Re: Larry Swedroe: 3% is the new 4%

Post by randomguy »

HomerJ wrote: Fri Feb 22, 2019 1:34 pm
randomguy wrote: Fri Feb 22, 2019 12:36 pmYes sequence of returns dominate but the point is that valuations suggest that we are looking at a poor sequence of returns. Valuations aren't great at short term predictions (<5 years) or long term (25+ years). They are best for the mid range (8-15).
Valuations don't say anything about sequence of returns.

Look, low overall returns don't doom 4%. 0% real gets you 25 years. 1% real gets you 30 years.

What mostly dooms 4% is a bad sequence of returns at the start of retirement. And not just a crash.

A long-drawn out downturn at the beginning of retirement is the danger.

A short crash that recovers quickly isn't enough to doom 4%. People who retired in 2000 or 2007 are doing fine.

So the main thing that dooms 4% is a long drawn out crash.

And valuations have zero predictive power there.

The "experts" can say long-term (or mid-term) "expected" returns are low based on valuations, but they are still high enough for 4% to work. "Expected" returns are higher than 1% real.

To say that 4% won't work, you have to say there will be a extended crash soon. And no one can predict that. Certainly not just from valuations.
Models suggest that 30 year returns are higher than 10 year returns. That is a poor sequence of returns. Now if the sequence is bad enough to lead to a 3% SWR or not is a whole different subject. And to some extent the crash doesn't have to be soon. I read the statement more as someone retiring in the next 1-15 years will get hit by 3% SWR not the person retiring tomorrow is going to have a 3% SWR. It is one thing to predict a correction. It is another thing to predict it will happen tomorrow.
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Re: Larry Swedroe: 3% is the new 4%

Post by grok87 »

siriusblack wrote: Fri Feb 22, 2019 10:55 am
grok87 wrote: Sun Feb 03, 2019 8:36 am I'm suspicious of arguments involving valuations etc. seems like market timing.
Valuations are relevant for "expected returns" going forward. Said differently: Historically, high valuations were followed by lower forward returns. (This could be different in the future, but I tend to think the relationship between valuations and future returns will more or less hold true in the future, although the magnitude of the effect may or may not be the same going forward as it was in the past.)

Here's a chart illustrating this (from a quick google image search-- probably better or more recent charts exist if anyone has one handy):
Image
thanks.
the trouble with charts like this is they are reaching for more than is really there in the data. From 1881-2015 there have only been about 13 ten year periods. But if you look at the S&P 500 series there appear to be like 100 + points. They create the 100 + points by using overlapping periods. This is basically statistically invalid as it violated the assumption of independence upon which regression rests. So its a pretty chart but pretty meaningless statistically.
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Re: Larry Swedroe: 3% is the new 4%

Post by EnjoyIt »

3% is the new sales pitch

by those who sell financial services. Fear always sells.
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Re: Larry Swedroe: 3% is the new 4%

Post by HomerJ »

grok87 wrote: Fri Feb 22, 2019 5:39 pm
siriusblack wrote: Fri Feb 22, 2019 10:55 am
grok87 wrote: Sun Feb 03, 2019 8:36 am I'm suspicious of arguments involving valuations etc. seems like market timing.
Valuations are relevant for "expected returns" going forward. Said differently: Historically, high valuations were followed by lower forward returns. (This could be different in the future, but I tend to think the relationship between valuations and future returns will more or less hold true in the future, although the magnitude of the effect may or may not be the same going forward as it was in the past.)

Here's a chart illustrating this (from a quick google image search-- probably better or more recent charts exist if anyone has one handy):
Image
thanks.
the trouble with charts like this is they are reaching for more than is really there in the data. From 1881-2015 there have only been about 13 ten year periods. But if you look at the S&P 500 series there appear to be like 100 + points. They create the 100 + points by using overlapping periods. This is basically statistically invalid as it violated the assumption of independence upon which regression rests. So its a pretty chart but pretty meaningless statistically.
It overlaps even more than that... See how it says 10-15 year returns? I think it has a dot 6 times for EACH year (one for 10-year returns from 2000, one for 11-year returns from 2000, one for 12-year returns from 2000, etc.) Because there were only what 2 years where CAPE was over 40 for the S&P 500, yet there's like 12 yellow dots above 40 in that graph.
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Re: Larry Swedroe: 3% is the new 4%

Post by 986racer »

It’s hard to believe anybody takes 3% seriously.

If you were only trying to match inflation (i.e., 0% real return), you could get 33.3 years of spending.

Essentially, 3% is saying you would lock in a negative return over 30 years. I think this is beyond pessimism and is downright fear mongering.

I’ve run Monte Carlo simulations that don’t have mean reversion, and the 4% rule does fail in about 5% of the cases. They almost all start with 3 back to back events (e.g., Great Depression followed by 1966 followed by 2000 dot-com meltdown). Even then, the portfolios still last until around year 25. If there is even a shred of being able to adjust spending after a 4 standard deviation set of events, I think most could make it to 30 years.
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Re: Larry Swedroe: 3% is the new 4%

Post by randomguy »

986racer wrote: Fri Feb 22, 2019 7:37 pm It’s hard to believe anybody takes 3% seriously.

If you were only trying to match inflation (i.e., 0% real return), you could get 33.3 years of spending.

Essentially, 3% is saying you would lock in a negative return over 30 years. I think this is beyond pessimism and is downright fear mongering.
No that isnt what 3% is saying. We could have 5% real over 30 years and a 3%SWR. You would just need a really bad first 20 years followed by a really good 10. Imagine great depression stock performance with 70s inflation.
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Re: Larry Swedroe: 3% is the new 4%

Post by 986racer »

randomguy wrote: Fri Feb 22, 2019 8:27 pm
986racer wrote: Fri Feb 22, 2019 7:37 pm It’s hard to believe anybody takes 3% seriously.

If you were only trying to match inflation (i.e., 0% real return), you could get 33.3 years of spending.

Essentially, 3% is saying you would lock in a negative return over 30 years. I think this is beyond pessimism and is downright fear mongering.
No that isnt what 3% is saying. We could have 5% real over 30 years and a 3%SWR. You would just need a really bad first 20 years followed by a really good 10. Imagine great depression stock performance with 70s inflation.
Yes, mathematically it is possible. As I said, the monte carlo simulations showed that you needed major financial disasters to occur back to back to back with no reprieve in-between. I just modeled up an example of great depression followed by dot com crash followed by 2008. That is 20 years of financial hell followed by a decade of returns ranging from 1-2 years of a low of 10%, a bunch of 25% and a few 50%. (You need those huge returns at the end to get back up to a 5% compounded real rate over 30 years).

In this scenario (as I said, back-to-back-to-back calamities), a 4% SWR would only last 20 years but a 3% would ride it out.

Could such a scenario happen? I guess anything is possible, but I put this in the realm of "the entire financial system is about to break down and nobody will try to fix it" scenario. It is not a "stocks seem overvalued by historic measures and bond yields are low" scenario.

In the financial armageddon scenario, I'm not sure the allocation of stocks vs bonds may be that important. I think the allocation of funds between food and weapons may be more significant. I.e., physical security may be far more important than financial security.
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Re: Larry Swedroe: 3% is the new 4%

Post by randomguy »

986racer wrote: Fri Feb 22, 2019 10:26 pm
randomguy wrote: Fri Feb 22, 2019 8:27 pm
986racer wrote: Fri Feb 22, 2019 7:37 pm It’s hard to believe anybody takes 3% seriously.

If you were only trying to match inflation (i.e., 0% real return), you could get 33.3 years of spending.

Essentially, 3% is saying you would lock in a negative return over 30 years. I think this is beyond pessimism and is downright fear mongering.
No that isnt what 3% is saying. We could have 5% real over 30 years and a 3%SWR. You would just need a really bad first 20 years followed by a really good 10. Imagine great depression stock performance with 70s inflation.
Yes, mathematically it is possible. As I said, the monte carlo simulations showed that you needed major financial disasters to occur back to back to back with no reprieve in-between. I just modeled up an example of great depression followed by dot com crash followed by 2008. That is 20 years of financial hell followed by a decade of returns ranging from 1-2 years of a low of 10%, a bunch of 25% and a few 50%. (You need those huge returns at the end to get back up to a 5% compounded real rate over 30 years).

In this scenario (as I said, back-to-back-to-back calamities), a 4% SWR would only last 20 years but a 3% would ride it out.

Could such a scenario happen? I guess anything is possible, but I put this in the realm of "the entire financial system is about to break down and nobody will try to fix it" scenario. It is not a "stocks seem overvalued by historic measures and bond yields are low" scenario.

In the financial armageddon scenario, I'm not sure the allocation of stocks vs bonds may be that important. I think the allocation of funds between food and weapons may be more significant. I.e., physical security may be far more important than financial security.
What AA were you using? Bonds performed decently during those periods so in a lot of ways they were not as hard as the high inflation periods for retirees. I think it is a stretch to assume that society would break down by the time we got to 3%. Imagine the 1966-1981 case just lasting say another 2-3 years. Losing another 30% of your portfolio to inflation would have drastically reduced the SWR. I don't remember being close to riots in the streets in 1980s. And of course Japan has done ok despite historically wretched markets.

That being said, put me in the 4% camp. Something that survived the great depression and stagflation is good enough for me. I don't have enough faith in any model or assumptions to go more conservative.
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willthrill81
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Re: Larry Swedroe: 3% is the new 4%

Post by willthrill81 »

randomguy wrote: Sat Feb 23, 2019 12:38 am
986racer wrote: Fri Feb 22, 2019 10:26 pm
randomguy wrote: Fri Feb 22, 2019 8:27 pm
986racer wrote: Fri Feb 22, 2019 7:37 pm It’s hard to believe anybody takes 3% seriously.

If you were only trying to match inflation (i.e., 0% real return), you could get 33.3 years of spending.

Essentially, 3% is saying you would lock in a negative return over 30 years. I think this is beyond pessimism and is downright fear mongering.
No that isnt what 3% is saying. We could have 5% real over 30 years and a 3%SWR. You would just need a really bad first 20 years followed by a really good 10. Imagine great depression stock performance with 70s inflation.
Yes, mathematically it is possible. As I said, the monte carlo simulations showed that you needed major financial disasters to occur back to back to back with no reprieve in-between. I just modeled up an example of great depression followed by dot com crash followed by 2008. That is 20 years of financial hell followed by a decade of returns ranging from 1-2 years of a low of 10%, a bunch of 25% and a few 50%. (You need those huge returns at the end to get back up to a 5% compounded real rate over 30 years).

In this scenario (as I said, back-to-back-to-back calamities), a 4% SWR would only last 20 years but a 3% would ride it out.

Could such a scenario happen? I guess anything is possible, but I put this in the realm of "the entire financial system is about to break down and nobody will try to fix it" scenario. It is not a "stocks seem overvalued by historic measures and bond yields are low" scenario.

In the financial armageddon scenario, I'm not sure the allocation of stocks vs bonds may be that important. I think the allocation of funds between food and weapons may be more significant. I.e., physical security may be far more important than financial security.
What AA were you using? Bonds performed decently during those periods so in a lot of ways they were not as hard as the high inflation periods for retirees. I think it is a stretch to assume that society would break down by the time we got to 3%. Imagine the 1966-1981 case just lasting say another 2-3 years. Losing another 30% of your portfolio to inflation would have drastically reduced the SWR. I don't remember being close to riots in the streets in 1980s. And of course Japan has done ok despite historically wretched markets.

That being said, put me in the 4% camp. Something that survived the great depression and stagflation is good enough for me. I don't have enough faith in any model or assumptions to go more conservative.
As time goes on and I consider the pros and cons of various withdrawal strategies, I'm really growing to prefer the 'time value of money' formulaic approach, where you make ongoing adjustments to your withdrawals based on the size of your current portfolio, the size of your terminal portfolio, your return expectations, and the length of time of your estimated withdrawals. It sounds complicated, and you can certainly make it as complicated as you want, but it can be done with simple assumptions in under one minute with a financial calculator. And it carries the feature of never prematurely depleting your portfolio. The big key becomes having a portfolio large enough in relation to your essential spending that the latter can be satisfied in virtually any realistic scenario, maybe 40-50x, leaving additional withdrawals for discretionary spending that cut be reduced if/when needed.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings
EnjoyIt
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Re: Larry Swedroe: 3% is the new 4%

Post by EnjoyIt »

willthrill81 wrote: Sat Feb 23, 2019 12:52 am
randomguy wrote: Sat Feb 23, 2019 12:38 am
986racer wrote: Fri Feb 22, 2019 10:26 pm
randomguy wrote: Fri Feb 22, 2019 8:27 pm
986racer wrote: Fri Feb 22, 2019 7:37 pm It’s hard to believe anybody takes 3% seriously.

If you were only trying to match inflation (i.e., 0% real return), you could get 33.3 years of spending.

Essentially, 3% is saying you would lock in a negative return over 30 years. I think this is beyond pessimism and is downright fear mongering.
No that isnt what 3% is saying. We could have 5% real over 30 years and a 3%SWR. You would just need a really bad first 20 years followed by a really good 10. Imagine great depression stock performance with 70s inflation.
Yes, mathematically it is possible. As I said, the monte carlo simulations showed that you needed major financial disasters to occur back to back to back with no reprieve in-between. I just modeled up an example of great depression followed by dot com crash followed by 2008. That is 20 years of financial hell followed by a decade of returns ranging from 1-2 years of a low of 10%, a bunch of 25% and a few 50%. (You need those huge returns at the end to get back up to a 5% compounded real rate over 30 years).

In this scenario (as I said, back-to-back-to-back calamities), a 4% SWR would only last 20 years but a 3% would ride it out.

Could such a scenario happen? I guess anything is possible, but I put this in the realm of "the entire financial system is about to break down and nobody will try to fix it" scenario. It is not a "stocks seem overvalued by historic measures and bond yields are low" scenario.

In the financial armageddon scenario, I'm not sure the allocation of stocks vs bonds may be that important. I think the allocation of funds between food and weapons may be more significant. I.e., physical security may be far more important than financial security.
What AA were you using? Bonds performed decently during those periods so in a lot of ways they were not as hard as the high inflation periods for retirees. I think it is a stretch to assume that society would break down by the time we got to 3%. Imagine the 1966-1981 case just lasting say another 2-3 years. Losing another 30% of your portfolio to inflation would have drastically reduced the SWR. I don't remember being close to riots in the streets in 1980s. And of course Japan has done ok despite historically wretched markets.

That being said, put me in the 4% camp. Something that survived the great depression and stagflation is good enough for me. I don't have enough faith in any model or assumptions to go more conservative.
As time goes on and I consider the pros and cons of various withdrawal strategies, I'm really growing to prefer the 'time value of money' formulaic approach, where you make ongoing adjustments to your withdrawals based on the size of your current portfolio, the size of your terminal portfolio, your return expectations, and the length of time of your estimated withdrawals. It sounds complicated, and you can certainly make it as complicated as you want, but it can be done with simple assumptions in under one minute with a financial calculator. And it carries the feature of never prematurely depleting your portfolio. The big key becomes having a portfolio large enough in relation to your essential spending that the latter can be satisfied in virtually any realistic scenario, maybe 40-50x, leaving additional withdrawals for discretionary spending that cut be reduced if/when needed.
It seams complicated, especially if I become incapacitated and my spouse needs to handle things. I need a simple and easy to follow withdrawal strategy.

I fully agree that they key to success is to having very low fixed expenses compared to total expenses and then being flexible on your discretionary spend based on need and market activity.

I also expect some margin of lifestyle creep in the early years of our retirement. In addition I suspect that during that time I will likely find some activity that happens to earn money. I suspect we will get some form of SS.
I suspect that our portfolio will grow over the years and we should be able to fund that lifestyle creep. I suspect I will eventually die leaving a lot of money behind.
A time to EVALUATE your jitters: | https://www.bogleheads.org/forum/viewtopic.php?f=10&t=79939&start=400#p5275418
grok87
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Re: Larry Swedroe: 3% is the new 4%

Post by grok87 »

HomerJ wrote: Fri Feb 22, 2019 6:49 pm
grok87 wrote: Fri Feb 22, 2019 5:39 pm
siriusblack wrote: Fri Feb 22, 2019 10:55 am
grok87 wrote: Sun Feb 03, 2019 8:36 am I'm suspicious of arguments involving valuations etc. seems like market timing.
Valuations are relevant for "expected returns" going forward. Said differently: Historically, high valuations were followed by lower forward returns. (This could be different in the future, but I tend to think the relationship between valuations and future returns will more or less hold true in the future, although the magnitude of the effect may or may not be the same going forward as it was in the past.)

Here's a chart illustrating this (from a quick google image search-- probably better or more recent charts exist if anyone has one handy):
Image
thanks.
the trouble with charts like this is they are reaching for more than is really there in the data. From 1881-2015 there have only been about 13 ten year periods. But if you look at the S&P 500 series there appear to be like 100 + points. They create the 100 + points by using overlapping periods. This is basically statistically invalid as it violated the assumption of independence upon which regression rests. So its a pretty chart but pretty meaningless statistically.
It overlaps even more than that... See how it says 10-15 year returns? I think it has a dot 6 times for EACH year (one for 10-year returns from 2000, one for 11-year returns from 2000, one for 12-year returns from 2000, etc.) Because there were only what 2 years where CAPE was over 40 for the S&P 500, yet there's like 12 yellow dots above 40 in that graph.
thanks.
yes i was wondering about that.
the chart seems to be a good example of data mining- reaching for more in the data than is really there...
the reality is we just don't know. there may be some link between valuations and future returns. but it is fairly tentative, not anything you would want to act on with a high degree of confidence...
RIP Mr. Bogle.
986racer
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Re: Larry Swedroe: 3% is the new 4%

Post by 986racer »

randomguy wrote: Sat Feb 23, 2019 12:38 am What AA were you using? Bonds performed decently during those periods so in a lot of ways they were not as hard as the high inflation periods for retirees. I think it is a stretch to assume that society would break down by the time we got to 3%. Imagine the 1966-1981 case just lasting say another 2-3 years. Losing another 30% of your portfolio to inflation would have drastically reduced the SWR. I don't remember being close to riots in the streets in 1980s. And of course Japan has done ok despite historically wretched markets.

That being said, put me in the 4% camp. Something that survived the great depression and stagflation is good enough for me. I don't have enough faith in any model or assumptions to go more conservative.
Mathematically, the AA doesn't matter. We are looking at net returns for the portfolio. However, I picked 100% stock to provide a worst case scenario for this investor. My point is exactly that I have to not only pick the worst periods in history, put them back-to-back-to-back, but also pick a bad AA before 3% becomes needed.

I feel a lot of people just say something like 3% is really close to 4% and don't really consider that that is a huge difference when compounded over 30 years. Plus 3% is essentially a negative real return over that timeframe. With the interest rates provided by online banks like Ally, CapitalOne, Redneck, etc., it may be possible to guarantee that return by just parking the funds there. Are we really saying that we don't expect the market to beat that over 30 years?

Putting the portfolio in TIPS basically guarantees a 4% SWR. For that to fail, we'd need the government to basically default on that debt. Or, it just starts printing money to pay for it and we get into hyperinflation in the US (that's really just a different form of defaulting). If people are saying that they are expecting the US to default, then I could start to buy into the idea that 3% makes sense. In that scenario, I don't think the SWR will matter as people will learn that their assets were only numbers in some account and they will quickly find themselves broke unless they had hard assets that could be used for bartering.

And I understand your point that 3% is just really showing a really bad sequence of returns could impact a portfolio. This makes the argument worse in my view. Essentially the doomsayers are saying not only that things will be bad, they are going to be near financial armageddon levels, and they are going to occur imminently. Furthermore, those conditions are going to last 20 years. That's one hell of a prediction. So, yes, to use your example, they are saying that we are on the cusp of 1966-1981, but then those conditions will be followed up by another 5 years of disaster, and all of that is about to start in the next year or two.
naha66
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Re: Larry Swedroe: 3% is the new 4%

Post by naha66 »

willthrill81 wrote: Sat Feb 23, 2019 12:52 am
randomguy wrote: Sat Feb 23, 2019 12:38 am
986racer wrote: Fri Feb 22, 2019 10:26 pm
randomguy wrote: Fri Feb 22, 2019 8:27 pm
986racer wrote: Fri Feb 22, 2019 7:37 pm It’s hard to believe anybody takes 3% seriously.

If you were only trying to match inflation (i.e., 0% real return), you could get 33.3 years of spending.

Essentially, 3% is saying you would lock in a negative return over 30 years. I think this is beyond pessimism and is downright fear mongering.
No that isnt what 3% is saying. We could have 5% real over 30 years and a 3%SWR. You would just need a really bad first 20 years followed by a really good 10. Imagine great depression stock performance with 70s inflation.
Yes, mathematically it is possible. As I said, the monte carlo simulations showed that you needed major financial disasters to occur back to back to back with no reprieve in-between. I just modeled up an example of great depression followed by dot com crash followed by 2008. That is 20 years of financial hell followed by a decade of returns ranging from 1-2 years of a low of 10%, a bunch of 25% and a few 50%. (You need those huge returns at the end to get back up to a 5% compounded real rate over 30 years).

In this scenario (as I said, back-to-back-to-back calamities), a 4% SWR would only last 20 years but a 3% would ride it out.

Could such a scenario happen? I guess anything is possible, but I put this in the realm of "the entire financial system is about to break down and nobody will try to fix it" scenario. It is not a "stocks seem overvalued by historic measures and bond yields are low" scenario.

In the financial armageddon scenario, I'm not sure the allocation of stocks vs bonds may be that important. I think the allocation of funds between food and weapons may be more significant. I.e., physical security may be far more important than financial security.
What AA were you using? Bonds performed decently during those periods so in a lot of ways they were not as hard as the high inflation periods for retirees. I think it is a stretch to assume that society would break down by the time we got to 3%. Imagine the 1966-1981 case just lasting say another 2-3 years. Losing another 30% of your portfolio to inflation would have drastically reduced the SWR. I don't remember being close to riots in the streets in 1980s. And of course Japan has done ok despite historically wretched markets.

That being said, put me in the 4% camp. Something that survived the great depression and stagflation is good enough for me. I don't have enough faith in any model or assumptions to go more conservative.
As time goes on and I consider the pros and cons of various withdrawal strategies, I'm really growing to prefer the 'time value of money' formulaic approach, where you make ongoing adjustments to your withdrawals based on the size of your current portfolio, the size of your terminal portfolio, your return expectations, and the length of time of your estimated withdrawals. It sounds complicated, and you can certainly make it as complicated as you want, but it can be done with simple assumptions in under one minute with a financial calculator. And it carries the feature of never prematurely depleting your portfolio. The big key becomes having a portfolio large enough in relation to your essential spending that the latter can be satisfied in virtually any realistic scenario, maybe 40-50x, leaving additional withdrawals for discretionary spending that cut be reduced if/when needed.
40-50x really Who will be able retire with those numbers. So if I want 20k a year I need 800k to 1 million. I see you like The Lord of the Rings, you need to get out fantasy land. :happy
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privatefarmer
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Re: Larry Swedroe: 3% is the new 4%

Post by privatefarmer »

siamond wrote: Mon Feb 04, 2019 10:18 pm
Socal77 wrote: Mon Feb 04, 2019 9:52 pmThat's a great way to communicate the subtleties of SWR being anchored at a starting portfolio sum vs. a distribution from a current portfolio sum but I'm not sure it makes a difference in what I am communicating - RMD's being a reference for thinking about how much to withdraw from a portfolio.

To make this even more simple lets just say you retire at 70.5 and are looking at what your SWR should be. Well, 3.65% is a good place to start because you're legally obligated to withdraw that amount.

I'm not saying you're wrong, you helped clarify your and other posters thinking that SWR are not related directly to RMD's.

I'm just saying the RMD gives you a sort of reference point for SWR's. I'm not saying they are the same. My thinking just helps me understand how "far off" some peoples SWR opinions may be.

I really fail to see how others can't see the logic in using RMD's as a reference point for the SWR, even though SWR is not RMD. Most people probably adjust their opinion of their personal SWR every year anyway according to market performance anyway. After 70.5, the govt calcs your SWR regardless of your original balance when you retired.
I think it's just a slight disconnect about terminology. You seem to be using 'SWR' as a withdrawal rate, to be applied to the current portfolio balance, and which would provide a fairly good safety (i.e. not withdrawing too much) in terms of your portfolio continuing to deliver decent (albeit variable) income during the rest of your retirement. And yes, the RMD rate does match this definition in a reasonable manner.

It's a fine way to define things, but when most people (notably researchers) speak of the SWR metric, they really mean the idea of history-tested (inflation-adjusted) fixed withdrawals. Where the rate only applies to the starting portfolio. This is not the same thing, even if the high-level idea is similar, and this is what I was trying to clarify.

But hey, no point getting hung up on terminology... As long as you're clear in your mind about what you're referring to, this is fine. And if you ask me, the RMD idea is WAY more sound than the fixed withdrawal approach, because it WILL do a decent job irrespective of what the future might throw at us, while the SWR approach might royally fail. This being said, I would encourage you to further investigate other time value of money approaches, the RMD approach is overly conservative and will skew the withdrawals upwards (on average, in the midst of the ups and downs of the market), which doesn't quite seem desirable. I actually recently wrote a blog article about such topic, take a look...
bingo. another thing that we have to remember is that obviously we are going to spend less during bear markets and more during bulls. it's psychological, human behavior. see how easy it'll be to plan that next lavish trip when the market is down 40%.

when you're retired, you either were forced into medically in which case none of this matters (you're going to spend what you have to to stay alive, and go on Medicaid if need be) or you CHOSE to leave the workforce and spend your time more leisurely. if the latter is the case then I would presume that a very large chunk of your money is being spend on WANTS vs needs (ie vacations). so the only reason one would need to worry about this SWR is if they CHOSE to retire, not were forced into it. If you are in that group, then you will naturally spend less during bad markets because the unease you'd get from spending more would far outweigh any pleasure gained.

Point being, if you are saving anywhere near 25x spending you are in FAR better shape that the vast majority of the WORLD, let alone the united states. We all die someday no matter how wealthy you are. Analyzing this too much is simply a waste of time and energy.
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